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662 S.E.2d 697
IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA
January 2008 Term
___________
No. 33379
___________
BARRY D. SCHMEHL, an individual as an
officer of Filly's of America, Inc.,
Petitioner Below, Appellant
v.
VIRGIL T. HELTON, Acting State Tax
Commissioner of West Virginia,
Respondent Below, Appellee
________________________________________________________
Appeal from the Circuit Court of Jefferson County
Hon. Thomas W. Steptoe, Jr., Judge
Case No. 05-C-337
AFFIRMED
________________________________________________________
Submitted: January 9, 2008
Filed: February 27, 2008
Michael E. Caryl, Esq.
Darrell V. McGraw, Jr.
Bowles, Rice, McDavid, Graff & Love Attorney General
Charleston, West Virginia
A. M. “Fenway” Pollack
Attorney for Appellant
Assistant Attorney General
Charleston, West Virginia
Attorneys for Appellee
JUSTICE STARCHER delivered the Opinion of the Court.
JUSTICE ALBRIGHT concurs in part, and dissents in part, and
reserves the right to file a separate opinion.
SYLLABUS BY THE COURT
1. “'To establish that a taxing statute, valid on its face, is so unreasonable
or arbitrary as to amount to a denial of due process of law when applied in a particular case,
the taxpayer must prove by clear and cogent evidence facts establishing unreasonableness
or arbitrariness.' Point 4, Syllabus,
Norfolk and Western Railway Company v. Field, 143
W.Va. 219 [100 S.E.2d 796 (1957)].” Syllabus Point 2,
State ex rel. Haden v. Calco Awning,
153 W.Va. 524, 170 S.E.2d 362 (1969).
2. “W.Va.Code, 11-15-17 (1978), explicitly provides that an officer of a
corporation shall be personally liable for any consumers sales and service tax along with any
additions, penalties, and interest thereon owed by the corporation.” Syllabus Point 1, Frymier-Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d 780 (1995).
3. Under the due process protections of the West Virginia Constitution,
Article III, Section 10, in the absence of statutory or regulatory language setting forth
standards for the imposition of personal liability for unpaid and unremitted sales taxes on
individual corporate officers pursuant to W.Va. Code, 11-15-17 [1978], such liability may
be imposed only when such imposition is in an individual case not arbitrary and capricious
or unreasonable, and such imposition is subject to a fundamental fairness test. The burden
is on the person seeking to avoid such liability to show with clear and convincing evidence,
giving due deference to the statute's general authorization for the imposition of such liability,
that it would be fundamentally unfair and an arbitrary and capricious or unreasonable act to
impose such liability.
Starcher, J.:
In this case we uphold a decision by the Circuit Court of Jefferson County
holding that a corporate officer and bookkeeper for a bar and restaurant business can be held
liable to the State Tax Department for consumer sales taxes that were collected by the
business from customers, but were not sent in to the State as required by law.
I.
Facts & Background
In the instant case, the Circuit Court of Jefferson County, in a July 5, 2006
order, upheld a ruling by the West Virginia Office of Tax Appeals in favor of the appellee,
the Tax Commissioner of the State of West Virginia. The Tax Commissioner had ruled that
the appellant, Barry D. Schmehl, was liable to the State of West Virginia for $172,816.63.
This sum represented unremitted consumer sales taxes that were collected from customers
making purchases at a bar and restaurant in the Town of Ranson, in Jefferson County, West
Virginia _ plus penalties and interest. The bar and restaurant was owned and operated by a
West Virginia corporation, Filly's of America, Inc. (“Filly's”). Mr. Schmehl was Filly's
corporate secretary and principal bookkeeper. Additional pertinent facts are presented in
section III of this opinion.
II.
Standard of Review
The issues in the instant case largely involve the application of the law to
undisputed facts, in which circumstances we review the lower tribunals' rulings under a
de
novo standard.
In Re Petrey, 206 W.Va. 489, 490, 525 S.E.2d 680, 681 (1999).
III.
Discussion
Two issues are presented in the instant case. The first issue is whether Mr.
Schmehl can be held personally liable for sales taxes that were collected by Filly's but not
remitted to the State.
(See footnote 1) The second issue is whether, assuming such personal liability is
proper, the applicable statute of limitations bars collection of unremitted taxes from Mr.
Schmehl.
A.
Personal Liability for Unremitted Sales Taxes
We begin our discussion of this issue by identifying the principles of law that
will guide our decision. Then we discuss the particular facts of the instant case in light of
those principles.
The primary applicable statute involved in the instant case is W.Va. Code, 11-
15-17 [1978], which states, in full:
If the taxpayer is an association or corporation, the officers
thereof shall be personally liable, jointly and severally, for any
default on the part of the association or corporation, and
payment of the tax and any additions to tax, penalties and
interest thereon imposed by article ten [§ 11-10-1 et seq.] of this
chapter may be enforced against them as against the association
or corporation which they represent.
Addressing a prior but similar version of W.Va. Code, 11-15-17 [1978], this
Court held in Syllabus Point 2 of State ex rel. Haden v. Calco Awning, 153 W.Va. 524, 170
S.E.2d 362 (1969):
“To establish that a taxing statute, valid on its face, is so
unreasonable or arbitrary as to amount to a denial of due process
of law when applied in a particular case, the taxpayer must
prove by clear and cogent evidence facts establishing
unreasonableness or arbitrariness.” Point 4, Syllabus, Norfolk
and Western Railway Company v. Field, 143 W.Va. 219 (100
S.E.2d 796).
In Haden v. Calco Awning, a circuit court had declared that the prior version
of W.Va. Code, 11-5-17 [1978] was unconstitutional. The circuit court concluded that the
statute's facial imposition of personal liability on corporate officers for unpaid sales taxes,
without any requirement to show connection, duty, or responsibility on the officer's part
regarding the payment of the taxes in question, had the potential to unconstitutionally deprive
a corporate officer of property without due process of law.
Reversing the circuit court in Calco Awning, this Court stated:
The principal issue on this appeal is the constitutionality of the
provisions of Code, 1931, 11-15-17, as amended. That code
section, where pertinent, provides: “If the taxpayer is an
association or corporation, the officers thereof shall be
personally liable, jointly and severally, for any default on the
part of the association or corporation, and payment of the tax
may be enforced against them as against the association or
corporation which they represent.”
The tax commissioner, of course, defends the constitutionality
of that section. The individual defendants take the position that
the subject statute deprives them of their property without due
process of law by imposing upon them a tax of a third party (the
corporation) and is therefore unconstitutional as violative of the
Constitution of West Virginia and the Constitution of the United
States.
These contentions [by the defendants in Calco Awning] are
without merit. The position of an officer of a corporation,
relative to his individual liability for the debts of the
corporation, is not sacrosanct. While officers ordinarily are not
held responsible for corporate debts, it is well established that
where a statute so provides directors or officers may be required
to account personally for certain obligations of the corporation.
Such liability is usually imposed by statute for some official
delinquency and so long as the statute is afforded a fair and
reasonable interpretation so as to give effect to the legislative
intent as indicated by the language used, it is valid.
***
While the presumption of the constitutionality of a statute is
not conclusive it takes clear and convincing proof of
unreasonableness or arbitrariness to successfully rebut it. As
stated in 17 M.J. Statutes, Section 29, “A statute will not be
declared unconstitutional unless its repugnance to the
constitution be plain and palpable.” In the instant case the
defendants assert that the statute is arbitrary, unreasonable and
capricious in its application. No proof, however, was offered in
support of this assertion, the case having been submitted for
decision on the pleadings. In the circumstance of the present
record there is no way to determine whether the statute was
applied in the manner alleged by the defendants.
An examination of the statute fails to reveal any language that
would render it unconstitutional. This is a tax which the vendor
shall collect from the purchaser and pay to the tax commissioner
for the privilege of selling tangible personal property and of
dispensing certain selected services. Code, 1931, 11-15-3, as
amended. Said vendor, Calco in the instant case, merely collects
and holds this tax money for the state. This money, in effect, is
held in trust
. (See footnote 2)
***
This Court has repeatedly held that a statute may be
constitutional on its face but may be applied in an
unconstitutional manner. This is cogently reflected in
Norfolk
and Western Railway Company v. Field, 143 W.Va. 219, 100
S.E.2d 796, wherein the Court said in point 3 of the syllabus, “A
taxing statute, though valid on its face, may be invalid when
applied to particular circumstances or conditions of a particular
taxpayer.” Demonstrating that the burden of proof in
establishing unconstitutionality of a statute rests on the assailant
of the tax is point 4 of the syllabus which reads as follows: “To
establish that a taxing statute, valid on its face, is so
unreasonable or arbitrary as to amount to a denial of due process
of law when applied in a particular case, the taxpayer must
prove by clear and cogent evidence facts establishing
unreasonableness or arbitrariness.”
Id., 153 W.Va. at 526-530, 170 S.E.2d at 364-366 (citations omitted, emphasis added).
(See footnote 3)
This Court also addressed W.Va.Code, 11-15-17 [1978] in Frymier-Halloran
v. Paige, 193 W.Va. 687, 458 S.E.2d 780 (1995). In Frymier-Halloran, the corporate officer
in question (the secretary of the corporation) was held to be “personally responsible for state
tax compliance . . . due to personal and computer problems [when] she . . . failed to file
several state tax returns and to remit all of the tax due.” Id. at 690, 783.
This Court stated in Syllabus Point 1 of Frymier-Halloran:
W.Va.Code, 11-15-17 (1978), explicitly provides that an
officer of a corporation shall be personally liable for any
consumers sales and service tax along with any additions,
penalties, and interest thereon owed by the corporation.
This Court further stated in Frymier-Halloran:
There is clear authority that if an individual is deemed to be an
officer of a corporation, such individual may be held personally
liable for the consumers sales and service tax of such
corporation. W.Va.Code, 11-15-17 (1978), explicitly provides
that an officer of a corporation shall be personally liable for any
consumers sales and service tax along with any additions,
penalties, and interest thereon owed by the corporation.
Id., 193 W.Va. at 691, 458 S.E.2d at 784.
Haden v. Calco Awning and Frymier-Halloran thus stand for the proposition
that the Legislature can constitutionally impose liability for unpaid sales taxes on corporate
officers; and that a successful due process-based constitutional challenge to such imposition
in an individual case requires a showing by clear and convincing evidence that the imposition
of liability would be arbitrary and capricious and unreasonable to such a degree as to
constitute a violation of constitutional due process.
A number of jurisdictions have statutes that, like
W.Va. Code,
11-15-17
(1978), authorize the collection of unremitted consumer sales taxes from corporate officers.
(See footnote 4)
However, our research indicates that W.Va. Code, 11-15-17 [1978] (and associated
regulations) may be unique in that, unlike other jurisdictions, West Virginia law and
regulations give no policy-based or due process-based guidance or standards for deciding
when officer liability may or may not be imposed in a given case _ without running the risk
of being arbitrary and capricious or unreasonable, or without exceeding the bounds of due
process and fundamental fairness. (See Marcus v. Holle, 217 W.Va. 508, 527, 618 S.E.2d
517, 536 (2005) (“[a] due process analysis is founded upon the concept of fundamental
fairness”). In the absence of such legislative guidance, we shall review cases from other
jurisdictions interpreting and applying such “personal liability” statutes and standards.
In
State Board of Education v. Wirick, 93 Cal.App.4th 411, 112 Cal.Rptr.2d
919 (2001), the applicable statute stated that a corporate officer who had “control or
supervision of, or who is [or was] charged with the responsibility for the filing of returns or
the payment of tax, or who is [or was] under a duty to act for the corporation . . . shall be
personally liable for any unpaid taxes and interest and penalties on those taxes, if the officer
. . . wilfully fails to pay or cause to be paid any taxes due from the corporation . . .” 93
Cal.App.4th at 417, 112 Cal.Rptr.2d at 923.
(See footnote 5) The California court held that the statute was
properly applied to impose personal liability on an officer for unpaid taxes that had not been
paid by the corporation _ at the same time the corporation had paid other creditors millions
of dollars.
Id. at 431, 894.
In Rock v. Dept. of Taxes, 170 Vt. 1, 742 A.2d 1211 (1999), the court noted
that taxes like sales taxes are “commonly termed 'trust taxes' because the business withholds
or collects the taxes on behalf of the state from a third party and holds them in trust until
remittance to the state is due.” Id. at 3, 1213. Applying a statute that imposed personal
liability for unremitted use taxes on corporate officers who have a duty to collect and remit
the taxes, after a lengthy discussion of related state and federal cases and statutes the court
concluded:
As for appellant's contention, however, that the Department
inferred he had a duty to remit the trust taxes at issue from the
mere fact of his status as president of the corporation, a quick
review of the record and the Department's findings demonstrates
to the contrary that they are replete with factors establishing
appellant's authority and control over the corporation's finances
and his frequent exercise of that authority and control. By
adopting the three-part inquiry set forth above (position of
person in corporation, person's authority as established in
bylaws or contract, and person's actual exercise of control over
finances), with specific federal factors having potential but not
automatic relevancy, we deliberately place the focus of the
inquiry on substance over form-a focus that while professed at
the federal level is lost in much of the case law.
Id. at 8, 1218.
In
Vogel v. New York State Dept. of Taxation & Finance, 98 Misc.2d 222, 413
N.Y.S.2d 862 (1979), the court held that a “silent” corporate officer who played no active
role in corporate affairs and had no knowledge of unpaid taxes was not personally liable for
unpaid sales taxes. In contrast, in
Skaperdas, et al. v. Director, Division of Taxes, 14 N.J.
Tax 103, 113 (1994) the court held that corporate officers who had (or should have had)
knowledge of unpaid sales taxes, and who played an active role in the affairs of the
corporation, were personally liable for unpaid taxes (the court stated, “. . . I can find no case
which stands for the proposition that if another individual is also responsible [for remitting
sales taxes collected by the corporation], or perhaps has greater responsibility, the lesser
involved individuals are absolved of all liability.”)
Compare Cooperstein v. State Division
of Taxation, 13 N.J. Tax 68 (1993), (corporate officer who played no role in corporation's
business not liable for unremitted sales taxes).
(See footnote 6)
In Copeland v. Robinson, 25 Kan.App.2d 717, 970 P.2d 69 (1998), where
personal liability for unpaid taxes was statutorily linked to control or responsibility for
preparing tax returns and payment of taxes, the court held that a person charged with such
personal liability had a due process right to an opportunity to prove that no such control or
responsibility existed.
In Delassus v. Tracy, 70 Ohio St.3d 218, 218, 638 N.E.2d 528, 529-30 (1994),
the court held that the fact that a corporate officer “was required to obtain the permission of
[another person] for payment of any corporate obligation by check” did not relieve the officer
from personal liability for unremitted sales tax collections. See also Spithogianis v. Limbach,
53 Ohio St.3d, 559 N.E.2d 449 (1990) (delegation of check-signing duty was not a defense).
And in Cardellino v. Comptroller of the Treasury, 68 Md.App. 332, 511 A.2d 573 (1986),
the secretary-treasurer of the corporation who served as bookkeeper for the business was held
personally liable for a corporation's unpaid retail sales taxes.
In Igel v. Comm'r of Revenue, 566 N.W.2d 706 (Minn. 1997) the court stated:
This court reviews findings of fact of the tax court to determine
whether there was sufficient evidence to support the tax court's
decision. Benoit v. Commissioner of Revenue, 453 N.W.2d 336,
339 (Minn.1990). Conclusions of law, including interpretations
of statutes are, however, subject to de novo review.
When a corporation collects sales tax from third parties, the
corporation does so under an obligation to hold the tax in trust
for and to pay it over to the state of Minnesota. When sales tax
goes unpaid by the corporation, personal liability may be
imposed on certain parties involved in the corporation. . . . We
conclude that in the instant case, when imposition of liability on
a corporate officer for a sales tax deficiency is at issue, the Benoit factors can likewise be used to govern our analysis . . .:
(1) The identity of the officers, directors and stockholders of
the corporation and their duties; (2) The ability to sign checks on
behalf of the corporation; (3) The identity of the individuals who
hired and fired employees; (4) The identity of the individuals
who were in control of the financial affairs of the corporation;
and (5) The identity of those who had an entrepreneurial stake
in the corporation.
As a corporate officer of the Company, Igel was a “person”
within the meaning of the personal liability statute. The
question is whether he had “control of, supervision of, or
responsibility for” the payment of taxes. Before the tax court,
Igel conceded that he satisfied all of the Benoit factors. He
admitted he had been an officer and shareholder since the
Company's inception; that he had check signing authority; that
he took part in hiring and firing employees; that he signed
financial and other documents on behalf of the Company; that
he was involved in meetings to discuss how creditors would be
paid; and that he had an entrepreneurial stake in the Company.
He argued, nevertheless, that he should not be held personally
liable for the unpaid sales tax because he did not know that the
sales tax was unpaid until after he left the company and he no
longer had check signing authority at that time. The tax court
rejected the argument, concluding that it was irrelevant that the
unpaid tax was discovered after Igel left the company.
On appeal before this court, Igel makes two arguments. First,
without conceding that the Benoit factors are satisfied, he
contends he ought not be liable because he did not “fail” to pay
the sales tax, as required to impose personal liability . . ..
Igel's first argument, that he did not fail to pay the tax, is
premised on the contention that the statute which imposes
personal liability on a “person,” . . . ambiguous in that the
meaning of “fail to pay” is unclear. According to Igel, the
legislature could not have intended a person who acts prudently
to be held liable for unpaid tax. For a person to “fail to pay” tax,
Igel contends, the person's behavior must be negligent; it must
fall below some “prudent businessperson” standard. And, he
argues, because he acted as a prudent businessperson in setting
the tax payment as the highest priority, ensuring funds were
available to pay the tax, and employing and relying upon Reese
to handle tax matters, he should not be held liable.
Igel's contention that the statute is ambiguous has no merit. The
statute is clear on its face-when tax owed by a business entity is
not paid, a person, . . . becomes personally liable for that unpaid
tax. Neither the statute, nor the dictionary, nor common sense
dictate the inclusion of a “best efforts” defense for failure to pay
tax. Section 270.101 imposes a duty on certain persons to ensure
that a company's taxes are paid. When taxes are not paid, such
persons are liable for the delinquency.
To further bolster his argument that he did not “fail to pay,”
Igel points to the provision in federal law that imposes liability
for unpaid taxes only when a responsible person “willfully” fails
to collect and pay over taxes . . . He argues that because federal
law sometimes is used to interpret this state's tax statutes, this
court ought to impose the federal “willfulness” standard on the
sales tax scheme detailed in section 270.101. Igel ignores the
absence of a “willfulness” requirement in the state statute and
essentially asks this court to insert words into an otherwise
unambiguous statute, something we are loath to do. We decline
to take up Igel's suggestion that we insert into the tax scheme
for personal liability additional requirements not suggested,
much less required, by the plain language of the statute.
Igel's second argument is, likewise, unpersuasive. He argues,
much as he did in the tax court, that to be held personally liable,
he must be shown to have control, supervision or responsibility
for tax matters at the time the sales tax goes unpaid and at the
time the discrepancy is discovered. Because Igel had “absolutely
no control at the time the deficiency was discovered,” he argues
that the Benoit factors are not satisfied and he is, therefore, not
personally liable.
We disagree. Liability for trust fund taxes, including sales tax,
arises at the time the tax is collected. See Olsen v. United States, 952 F.2d 236, 238 (8th Cir.1991) (noting that liability for federal
employment tax withholdings coincides with collection of funds
and not the date the employer is required to pay them over to the
government). Thus, the critical time frame for determination of
personal liability . . . is the time of collection. This is the point
at which Igel became a trustee of the sales tax funds. He had a
continuing obligation to turn over those funds to the state-his
duty did not cease when he left the Company. A rule such as the
one suggested by Igel would lead to absurd results. Under Igel's
framework, in which liability may be imposed only if the person
was in control of or had responsibility for taxes both at time of
the deficiency and at the time of the deficiency's discovery, an
employer could conceivably embezzle sales tax funds due to the
state of Minnesota and avoid tax liability by leaving the
company before anyone discovered the theft.
In sum, we are unpersuaded by Igel's arguments and conclude
that he is a “person” . . . who failed to pay tax and is therefore
personally liable for the Company's unpaid sales tax for the
periods ending January 31, 1994 and February 28, 1994 . . ..
566 N.W.2d 708-710 (some internal citations omitted). See also Carlson v. Comm'r of
Revenue, 517 N.W.2d 48, 52 (Minn. 1994) (“a corporate officer cannot escape personal
liability [for unpaid withholding taxes] by contracting to breach the statutorily imposed
duty.”).
In sum, from the foregoing review of case law we can see that there is a variety
of statutory language in a number of jurisdictions specifying whether, when, and upon whom
personal liability for a corporation's unpaid sales taxes may be imposed. Most of this
statutory language has the decision ultimately resting on whether a person was to some
degree “responsible” for the taxes being paid, or had a “duty” regarding the payment of the
taxes, or, in some instances, whether the failure to pay the taxes was “willful.” The case law
that we have reviewed usually involves the proper interpretation and application of these
statutory terms, and the factors to be considered in doing so; and courts have come up with
a wide range of factors to be considered, selecting those factors in light of the specific
statutory language in question, and rarely having any one factor be determinative.
We now turn to the somewhat sketchy but essentially undisputed facts of the
instant case. Mr. Schmehl was associated with Filly's bar and restaurant operation in
Ranson, West Virginia from its inception. He was made a corporate officer (secretary) when
the corporation was formed in 1999, and remained its secretary, it appears, until at least
2005.
(See footnote 7) (In 2005 Mr. Schmehl testified at an administrative hearing before a Tax Department
ALJ in connection with the instant case, stating
inter alia that he became an officer of Filly's
because West Virginia liquor laws require a West Virginia resident as a corporate officer; it
appears that the other corporate officers may not have been West Virginia residents.) Mr.
Schmehl apparently had responsibility for maintaining Filly's corporate records (such as they
were), including minutes of corporate meetings, etc.
Mr. Schmehl testified that beginning in 1999 he worked as a bartender at
Filly's, for about a year and a half. At some point, Mr. Schmehl also began doing the
bookkeeping for the business, and he continued to do the bookkeeping after he stopped
working as a bartender. Mr. Schmehl testified that several months after he began doing
bookkeeping, his status switched from “employee” to “independent contractor.” (The record
does not further explain this change of employment status, or suggest that the status change
coincided with any actual change of duties.) During the 1999-2002 period, Mr. Schmehl
performed all of the bookkeeping services for the corporation; in 2002, he had a heart attack
and was “off for about a year.” He returned to service as a bookkeeper in 2003.
Mr. Schmehl's bookkeeping work included taking sales information from a
computerized cash register and computing the amount of sales tax that had been collected
from customers. He testified: “As often as I could, I'd write a check [for the tax] and send
it to the State.” On those occasions when Mr. Schmehl did not do the bookkeeping (when
he was ill or had “quit” for a period of time), he testified that the bookkeeping was done by
Filly's president, Paul Horn, or by Filly's vice-president, Angie Frailey. Mr. Schmehl
testified that when he was working for Filly's as a bookkeeper, he was the primary person
responsible for preparing sales tax returns and making sure the taxes were paid. He also
testified that Mr. Horn had to “approve” of such payments, and that on occasion Mr. Schmehl
had “quit” for a period of time because of problems like “not being able to take care of things
that needed to be taken care of, [like the sales tax]. Mr. Schmehl testified that he was
generally aware that Filly's was collecting sales tax from customers and not remitting that
tax money to the State.
Mr. Schmehl concedes that imposing personal liability on him for the unpaid
sales taxes is facially authorized by
W.Va. Code, 11-15-17 [1978].
(See footnote 8) He argues, however,
that this statute must be constitutionally applied to him, and properly cites to
Haden v. Calco
Awnin,
supra, for the proposition that such imposition must not be arbitrary and capricious
or unreasonable. The Tax Department and circuit court, applying this standard, found that
in Mr. Schmehl's case imposing such liability was not arbitrary or capricious or
unreasonable.
The foregoing discussion of case law from other jurisdictions has shown that
legislative and taxing bodies in different jurisdictions have used different but in many ways
similar terms to delineate what sort of connection a corporate officer must have with a
business to be liable for unpaid sales taxes, and courts have fleshed out that language by
identifying a wide range of factors to be considered in applying that language.
However, as noted, in West Virginia we have no statutory language giving
guidance as to when imposing personal liability is unreasonable, or to test when imposing
such liability would be arbitrary and capricious _ not even the semi-tautological words
“duty” or “responsible.” We are aware of no case from another jurisdiction in which the
standards to be applied, and the determination as to whether the application of those
standards is arbitrary and capricious or unreasonable, is entirely derived from constitutional
principles.
Of course, such policy- and fairness-based standard-setting, as long as the
standards fall within constitutional limits, is in the first instance more properly a task for the
Legislative and Executive branches rather than for this Court _ should those branches of
government choose to take on that task. However, in the absence of such a delineation, this
Court can and should look to other jurisdictions that have policy-based and “fundamental
fairness” due process-based standards for the imposition of personal liability for such unpaid
taxes, as expressed in their statutes and interpreted and applied by their courts, to see if those
jurisdictions' choice of statutory language, or the delineation of particular factors to be
considered in applying those jurisdictions' standards, should be adopted by this Court.
Upon such review, as contained in the foregoing discussion, we conclude that
a choice of a particular term to describe a corporate officer's connection with the payment
of sales taxes _ like “duty,” or “wilfulness,” or “responsibility” _ is not constitutionally
compelled. Rather, we conclude that the “arbitrary and capricious or unreasonable” standard
for imposing personal liability that this Court set forth in Haden v. Calco Awning, supra is
as good as any other. This standard has the benefit of permitting reference to relevant case
law from all of the jurisdictions that have decided cases in this area, does not unnecessarily
invade the province of other branches of government, and is consistent with the principle of stare decisis.
Based on all of the foregoing, we hold that under the due process protections
of the West Virginia Constitution, Article III, Section 10, in the absence of statutory or
regulatory language setting forth standards for the imposition of personal liability for unpaid
and unremitted sales taxes on individual corporate officers pursuant to W.Va. Code, 11-15-17
[1978], such liability may be imposed only when such imposition is in an individual case not
arbitrary and capricious or unreasonable, and such imposition is subject to a fundamental
fairness test. The burden is on the person seeking to avoid such liability to show with clear
and convincing evidence, giving due deference to the statute's general authorization for the
imposition of such liability, that it would be fundamentally unfair and an arbitrary and
capricious or unreasonable act to impose such liability.
In applying this test in the instant case, we observe that Mr. Schmehl was not
a “silent” corporate officer (Vogel, supra), but was directly involved with the business on a
daily basis. He did not deny that he received a significant financial benefit from the Filly's
business. It is not unfair, in fact, to make the assumption that Mr. Schmehl was paid for his
bookkeeping services (along with other employees and creditors of Filly's) at least in part
with the tax money that was paid by Filly's customers _ and held in trust by Filly's to be
remitted to the State. Furthermore, Mr. Schmehl would have known that fact better than
almost anyone _ because he was a person with a direct responsibility for computing and
sending in the taxes.
Additionally, Mr. Schmehl's self-serving assertion that the ultimate authority for approval of sending taxes to the State lay with the business's owner, Mr. Horn, does not
relieve Mr. Schmehl from his own independent responsibility to follow the law. (Skaperdas, Delassus, supra). Knowing that the law was not being complied with, Mr. Schmehl did not
resign or report the wrongdoing. And while Mr. Schmehl was apparently not actively
involved in Filly's business affairs during a portion of the time when taxes were not being
remitted, when he returned to the business he resumed the practice of not remitting sales
taxes.
Under every standard and case that this Court has identified, Mr. Schmehl has
not demonstrated with clear and convincing evidence that it is fundamentally unfair or
arbitrary and capricious or unreasonable for the provisions of
W.Va. Code, 11-15-17 [1978]
to be applied to him to impose personal liability for the unpaid taxes at issue.
(See footnote 9) On this issue,
the judgment of the Circuit Court of Jefferson County is affirmed.
B.
Statute of Limitations
The second issue is whether the statute of limitations bars the Tax Department
from recovering unpaid taxes from Mr. Schmehl. Again, we proceed by first identifying the
applicable legal principles, and then applying those principles to the facts of the instant case.
The general statute of limitations for assessing the amount of unpaid taxes, W.Va. Code, 11-10-15(a), [2006] states in pertinent part: (See footnote 10)
General rule. _ The amount of any tax, additions to tax,
penalties and interest imposed by this article or any of the other
articles of this chapter to which this article is applicable shall be
assessed within three years after the date the return was filed
(whether or not such return was filed on or after the date
prescribed for filing): Provided, That in the case of a false or
fraudulent return filed with the intent to evade tax, or in case no
return was filed, the assessment may be made at any time.
(Emphasis added.)
As previously noted, W.Va. Code, 11-15-17 [1978] states:
If the taxpayer is an association or corporation, the officers
thereof shall be personally liable, jointly and severally, for any
default on the part of the association or corporation, and payment of the tax and any additions to tax, penalties and
interest thereon imposed by article ten of this chapter may be enforced against them as against the association or corporation
which they represent.
(Emphasis added).
Finally, W.Va. C.S.R. §110-15-4a.7.1 [1993] states, in pertinent part:
An assessment against officers is considered to be a proceeding
for the collection of the tax liability of the corporation or
association. If the liability of the corporation or association is
determined to be due by an assessment which has become final,
as assessment against an officer must be made within five years after the assessment against the corporation or association has
become final.
(Emphasis added.)
In the instant case, the Tax Commissioner first assessed Filly's for the amount
of its unpaid sales taxes (plus interest and penalties) in December of 2000; that amount was
not paid, and the assessment became final. In November of 2004, the Tax Commissioner
issued a Notice of Assessment against the petitioner as an officer of the corporation. Mr.
Schmehl concedes that if the five-year statute of limitations for collection actions against
corporate officers set forth in W.Va. C.S.R. §110-15-4a.7.1 [1993] applies to the collection
action against him, the Tax Commissioner acted within the applicable period.
Mr. Schmehl argues, however, that because W.Va. Code, 11-15-17 [1978]
states that “payment . . . may be enforced against [corporate officers] as against the
association or corporation they represent[]” (emphasis added), therefore the same three-year
statute of limitations in W.Va. Code, 11-10-15(a), [2006] for assessing the amount of tax due
by a corporation must also apply to a subsequent enforcement action seeking payment of the
assessed amount by a corporate officer.
However, the legislative grant of permission to collect unremitted sales taxes
from corporate officers is not a mandate to initiate such collection/enforcement actions under
the same three-year time limitation required for the assessment of the amount due against the
corporation. The Legislature has rather approved a regulation going directly to this issue, W.Va. C.S.R. 110-15-4a.7.1 (1993) stating that such enforcement and collection actions
against corporate officers are subject to a five-year statute of limitations.
Mr. Schmehl cites to the 1990 case of In re Bowen, 116 B.R. 477 (S.D.W.Va.
1990). In that case, the bankruptcy judge stated that “[t]he Tax Department cites no authority for its position that issuance of a notice of jeopardy assessment [against a corporate officer
for personal liability for unpaid taxes] is a collection action . . . ” (emphasis added). The Bowen court held that the three-year statute of limitations for the assessment of amounts of
unpaid taxes in W.Va. Code, 11-10-15 [2002] was controlling.
In re Bowen is not persuasive in the instant case, because that opinion was
issued two years before the Legislature approved W.Va. C.S.R. §110-15-4a.7.1 [1993], which
provides direct authority for the position taken by the Tax Department. Mr. Schmehl argues
that the regulation contradicts the statute; but as noted above, nothing in the statute mandates
that a personal liability collection/enforcement action is subject to the same period of
limitation as an assessment of the underlying amount of taxes owed. Nor would such a
position make sense; the Tax Department should have a reasonable time to try to collect
unpaid taxes directly from a corporation, before having to consider taking action against
officers.
In United States v. Galletti, 541 U.S. 114, 124 S.Ct. 1548, ___ L.Ed.3d ___,
(2004), the Supreme Court was faced with a scenario similar to the one in the instant case.
The Internal Revenue Service assessed a partnership for unpaid employment taxes, within
the applicable three-year statute of limitations. Thereafter, the IRS attempted to collect the
unpaid taxes from the partners individually by filing a proof of claim in bankruptcy court.
The partners argued that in order for the ten-year statute of limitations regarding collections
to apply, the IRS must have separately assessed the partners individually within the three-
year statute of limitations. The Supreme Court disagreed, stating “[O]nce a tax has been
properly assessed, nothing in the Code requires the IRS to duplicate its efforts by separately
assessing the same tax against individuals or entities who are not the actual taxpayers but are,
by reason of state law, liable for payment of the taxpayer's debt.” 541 U.S. at 123, 124 S.Ct.
at 1554, ___ L.Ed.3d at ____ (2004).
For the foregoing reasons, we hold that the circuit court did not err in finding
that the applicable statute of limitations did not bar the collection of the unpaid taxes from
Mr. Schmehl.
IV.
Conclusion
We emphasize that our decision reaches only a narrow issue _ whether it was
permissible under the laws and regulations enacted and approved by the Legislature for the
Tax Commissioner to seek to recover the unpaid sales taxes from Mr. Schmehl. We have
applied the law as the Legislature wrote it and as we have interpreted that law in prior cases
_ reiterating an important due process protection of fundamental fairness in the absence of
relevant legislative provisions, in accord with the historic role of courts in our system of
government.
See generally, Calabresi, Guido,
A Common Law for the Age of Statutes,
Harvard University Press, 1982.
A corporate officer who can demonstrate that imposing personal liability for
unpaid and unremitted sales taxes would be arbitrary, capricious, or unreasonable will find
nothing to fear in this Court's ruling in the instant case. The judgment of the Circuit Court
of Jefferson County is affirmed.
No issue is presented regarding the liability of any other officer of Filly's in the
instant case.
Footnote: 2 The author of this opinion remembers when small town and country stores would
keep a container like a jar or box next to the cash register on the counter, where the
storekeeper placed the consumer sales tax portion of the money paid by customers at the time
of a purchase. “That's for our Governor!” the storekeeper would say, dropping coins into
the container. Today, computers do this separation almost everywhere _ but the principle
that sales tax receipts are separately held in trust by the merchant for the State has not
changed.
Footnote: 3 This Court has recognized that the Legislature may require a corporate officer to be
personally liable for certain unpaid obligations of the corporation if the officer “knowingly
permits” or “allow[s] with personal information or allow[s] by virtue of a position in which
the person should have known[]” the obligation not to be paid.
McDaniel v. W.Va. Division
of Labor, 214 W.Va. 719, 725 n.10, 591 S.E.2d 277, 283 n.10 (2003),
quoting Mullins v.
Venable, 171 W.Va. 92, 95 n.2, 297 S.E.2d 866, 870 n.2 (1982) (both cases involving unpaid
wages).
See also Britner v. Medical Security Card, Inc., 200 W.Va. 352, 356, 489 S.E.2d
734, 738 (1997) (it was no defense to personal liability for a company officer to claim that
workers were not paid “because the company did not have funds to make the payments.”
Cf.
Bowling v. Ansted Chrysler-Plymouth-Dodge, Inc., 188 W.Va. 468, 425 S.E.2d 144 (1992)
(corporate officers liable if they approved or sanctioned wrongful corporate action).
See also
State ex rel. Van Nguyen v. Berger, 199 W.Va. 71, 75-76, 483 S.E.2d 71, 75-76 (1997)
(
Mullins v. Venable principles that “corporate officers have a duty to see that their
corporation obeys the law,” and “corporate officers may not hide behind the corporate skirt
to escape liability for their unlawful mischief,” remain very persuasive).
Footnote: 4 68
Am.Jur.2d Sales & Use Taxes, Sec. 243 (November 2007) states:
In some jurisdictions, personal liability for a corporation's
unpaid sales or use taxes may be imposed upon a corporate
officer or employee, which may also include penalties or interest
due on the tax. For personal liability to be imposed, the officer
or employee must have a duty or be responsible for filing the
corporation's sales or use tax return or payment of such taxes
under some statutes, although such a duty may include an officer
or employee playing an active role in the corporation's overall
management, or having authority to exercise control or
supervision over tax return and tax payment activities, without
having actual financial control. On other hand, an officer or
director or employee who has little or no supervision or control
over such activities may be relieved from liability where
circumstances warrant such relief. Some schemes also impose
personal liability on an individual who is not a corporate officer,
director, or employee, but nevertheless has supervision or
control over a corporation's reporting or payment of sales or use
taxes due. A willful failure to file such returns or remit such
taxes may also be required before personal liability is imposed.
(footnotes omitted).
Footnote: 5 Brackets in original. The California statute only applied after corporate dissolution,
apparently because there was bonding to guarantee payment of such taxes during the life of
the corporation.
Id. at 418, 924.
Footnote: 6 In
Cooperstein, the court said:
From all of these New York cases, several principles can be
gleaned. First, the holding of corporate office does not, in and of
itself, permit the imposition of personal liability upon the office
holder for unpaid taxes of a corporation. Second, the
determination of whether a duty to act on behalf of the
corporation exists depends upon the balancing of a number of
factors. These factors include, but are not limited to:
1. The contents of the corporate by-laws.
2. One's status as an officer and/or stockholder.
3. Authority to sign checks and actual exercise of this
authority.
4. Authority to hire and fire employees and actual exercise of
this authority.
5. Responsibility to prepare and/or sign tax returns.
6. Day-to-day involvement in business or responsibility for
management.
7. Power to control payment of corporate creditors and taxes.
8. Knowledge of the failure to remit taxes when due.
9. Derivation of substantial income or benefits from the
corporation.
The federal cases interpreting the personal liability provisions
at 26 U.S.C.A. § 6671 appear to be consistent with the New
York cases in the imposition of personal liability on corporate
officers. Although liability is based on a balancing of the
factors previously mentioned, there appears, however, to be an
emphasis placed on the degree of influence and control which an
officer exercised in the affairs of the corporation. Specifically,
the federal courts focus on the nature and extent of the active
participation of the corporate officer in: (1) the financial affairs
of the corporation, (2) the decisions concerning the priority of
payment to creditors, and (3) the derivation of some personal
benefit from the corporation's failure to pay taxes. See In re
Premo, supra, 116 B.R. t 525-30 for a comprehensive review
and analysis of the federal decisions. The personal liability
concept, as revealed by the federal decisions, is not to penalize
a corporate officer solely because he or she is an officer, but to
reach the party or parties actually responsible for the
corporation's failure to pay the tax.
(Footnote omitted.)
Footnote: 7 The transcript of the hearing in the instant case in which Mr. Schmehl testified
suggests, on balance, that he did not own stock in Filly's _ although one of his recorded
answers suggests that he did own stock. The lower court referred to Mr. Schmehl's
inconsistent recorded answers about stock ownership as a factor in upholding the Tax
Commissioner. On appeal, Mr. Schmehl vigorously denies owning any stock in Filly's.
While stock ownership in a corporation might arguably be a factor in some instances in
looking at whether a corporate officer can be personally liable for unpaid taxes, the circuit
court's ruling does not turn solely on that issue, and this Court may in any event affirm the
circuit court on any proper basis, whether relied upon by the circuit court or not. We do not
further address the stock ownership issue, deeming it immaterial to our ruling.
Footnote: 8 Mr. Schmehl also argues that
W.Va. Code, 11-15-17 (1978) should be “liberally
construed” in his favor. But Mr. Schmehl points to no specific statutory language that needs
to be construed one way or another. The statute clearly imposes liability on Mr. Schmehl.
Mr. Schmehl also argues that he did not prepare tax returns, sign checks, etc. as an officer,
but as an employee or contractor. We are aware of no case or statute that suggests that such
a purported distinction exists or has significance in a personal tax liability case.
Footnote: 9 Corporations sometimes purchase Errors & Omissions (“E&O”) or similar liability
insurance policies that defend and indemnify corporate officers for personal liabilities they
may incur in their corporate role. Laws regarding businesses that sell alcohol often require
a bond of some sort for personnel. If insurance or bonding covered Mr. Schmehl in the
instant case, it may be that only by legally establishing his personal liability could the
proceeds thereof become available.
Footnote: 10
We cite to the most recent enactment of this statute as there is no reason to refer to
an earlier version.